There are basically two types of externalities in the market, positive and negative externalities. As for the scope of this paper, the only type of externality that will be considered is the negative one. In essence, all of the economic activities made impact to one another even they are involved or not involved in a given economic transaction. Externality exist if there is no market for the said impact to price it in order for the consumers and the government to determine the social price and quantity level of a given product in the economy (Cabnr.
unr. edu, 2006). Negative externalities, such as pollutants being emitted by a manufacturing plant, causes damages to the environment and could cause various diseases to people living near the vicinity of the manufacturing plant being concerned. If a person will incorporate the value of the negative impacts, in monetary terms, of pollutants being emitted by a given manufacturing plant to the environment and health of people living near its vicinity, then, the result would be a price higher than its private price level and a lower equilibrium quantity.
But the private firms do not incorporate this additional costs brought by the by-products of their manufacturing plants since they are only focusing on maximizing their profit. In short, the market prices of goods and services in the economy is really not its true value since producers do not include into the setting of their prices the negative externality that they emit to their external environment.
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With the existence of negative externality in the economy, the entire economy fails to attain the optimal level of social welfare, thereby, making the private firms inefficient in such matter. One real example of sources of negative externality would be the on-going debate of officials of Saudi Aramco, world’s most powerful oil company. The debate covers whether the said company would either to increase their investment to cater for the rising shortage in the world oil market by extracting oil faster or just wait until the market restructure and recover on itself (King, 2008).
As an impact to the US economy as well as to other oil consuming countries, the said on-going debate on major oil company would either shorten the oil reserves in the world market in the next coming of years if the extraction will be made faster or price of commodities in the market would continue to rise if the officials of Saudi Aramco would let the market to independently recover from the present unstable global oil industry.
In other words, even if the source of externality is from other country, it can still impose an impact to the members of the global community; and either the future outcome of the said debate on oil would still provide necessary impacts to the global community.
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